Market rally follows Democratic gains in US midterm elections

Similar positive trends were observed in Europe, with the CAC 40 in Paris and the DAX 40 in Frankfurt both rising by 2.2%, and US markets also showing strength, with the Dow Jones Industrial Average up 2.5%, the S&P 500 up 1.4%, and the Nasdaq Composite up 1.5%.

The market reaction stemmed from the Democrats securing control of both the Senate and the House of Representatives in the US midterm elections. Democrats achieved victories in key Republican strongholds, including Texas, South Carolina, and Kansas. Barclays Capital analyst Michael McLean estimates Democrats gained 43 seats in the House, the largest majority since at least 2009, and potentially seven to nine seats in the Senate, which could be the largest majority for either party since 2015.

Analysts at UBS noted that this shift in power could mean Democratic control of the Senate for at least six years, impacting the ability of Republicans to regain control in 2028 or 2030. The anticipated outcome of a divided government is expected to lead to legislative gridlock, which, while potentially challenging politically, is often viewed favorably by markets. Kathleen Brooks, research director at XTB, highlighted that midterm elections typically trigger market rallies.

Economist Raphael Olszyna-Marzys at J Safra Sarasin Sustainable Asset Management emphasized that the decisiveness of the election outcome reduced uncertainty and risk premiums in asset prices. Goldman Sachs anticipates Democrats will use upcoming fiscal deadlines to pursue policies like limiting the war with Iran and reversing spending cuts. However, they also caution that the results could lead to temporary restrictions on data center expansion in some states, potentially impacting about 45% of planned US capacity.

The dollar experienced downward pressure due to the election results, although market strategist Matthew Ryan at Ebury believes this effect will be limited. The pound strengthened to 1.3464 dollars, up from 1.3416 dollars, and the euro rose to 1.1222 dollars from 1.1197 dollars. Eurozone consumer price inflation accelerated to 4.0% year-on-year in October, driven by rising energy costs.

Goldman Sachs expects Democrats to use fiscal deadlines to seek to limit the war with Iran, roll back selected tariffs and reverse spending cuts enacted last year.

Shares in Fresnillo and Endeavour Mining benefited from the weaker dollar, while Marks & Spencer saw a 6.4% jump after pledging to address performance issues within its fashion, home, and beauty division. The company reported a significant rise in pre-tax profit to £355.1 million, recovering from a previous cyber attack. Banks including NatWest, HSBC, and Lloyds Banking Group also performed strongly, while Weir fell 9.6% and defense manufacturers BAE Systems and Babcock International declined due to concerns about the impact of the election results.